Asset (Mis)management

I have written before (“Best Use”) on the damaging effect of the land lease structure in Hong Kong on the ability of land use to change to reflect community needs. That piece focussed on leases held by the private sector. This month I want to examine what inefficiencies result from the publicly held estate.

The incentives with a privately held asset are to maximise its value. That could be a value consumed by the owner, through occupation of the flat. If the asset is an investment, the owner will rent it out or otherwise try to gain value from it. (I recognise that there are owners who appear to allow assets to remain unused. But these are rare and occur despite the incentives, not because of them.)

In the public estate, matters are quite different. Many sites controlled by bureaux and departments of the Government lie either unused or suboptimally used. Partly this may be due to site-use specifics of the land leases, as discussed in my Best Use piece. For example empty school sites cannot, under our current system, be easily switched to meet other needs. Hence the Bureau’s seeking international schools to bid for some of these. No change in use needs to be sanctioned in that case. But switching out of educational use is more difficult.

More generally the failure to maximise value for the community comes not from land use restrictions but from other perverse incentives. These sites are out of the public eye politically (although you may walk past them every day and wonder why they lie vacant). Little criticism is occasioned by their lack of use, except perhaps occasional comments from the Government Auditor. By contrast, attempts to bring a vacant site into use will frequently lead to political criticism from those who would prefer a different use to the one proposed. For the civil servants concerned the best way of avoiding criticism is to do nothing with the site. In other words the incentives are against maximising the value for the community. The perverse result is that public sector ownership of assets is not in the public interest!

Let me take a specific example of what I mean. The Central Market site between Des Voeux Road and Queen’s Road Central ceased to be used as a market many years ago. Around 2005 (maybe it was earlier, my memory is not clear) the site was placed on the Lands Department’s Application list, where private sector developers could bid for it to be put up for auction. Had this gone ahead the site would almost certainly be a modern office building today, given the severe shortage of office space in Central (a key reason why rents are so high). Before an auction could take place the Government withdrew the site. Some “concern” groups did not want the building redeveloped, preferring it to be refurbished as a historic building for “public” purposes. For more than 10 years no use has been made of that site. The URA was introduced to manage the “political” debate between many “interest groups”. Eventually a plan was agreed that limits its use to supposed public interest purposes.

Without addressing the question of whether the final plan represents “best use” for the community, my concern is with the loss of value to the community due to the lack of use of that site for over a decade. Had it been promptly redeveloped as an office building in the heart of Central it would have generated millions of dollars of income. That revenue should not be dismissed as merely “profits for greedy tycoons”. That revenue would have represented willingly paid rent by occupiers who needed the space for their businesses. That is value to the community of Hong Kong which has been lost because of the lack of use of a prime asset. No private company would have left that asset idle for 10 years.

Imagine now how many sites across Hong Kong suffer from a similar situation. Given high land values in our city, this represents a truly phenomenal sacrifice of value. I am sure if you found a site and enquired of the relevant bureau why is was not being used, there would be many answers about how the regulatory rule book would not permit change of use, or perhaps “interest groups” might oppose it. That “rule book” is costing the citizens of Hong Kong a huge amount of value foregone. No doubt our bureaucrats and politicians would argue this is all in the “public interest”, as defined by them. Yet the true “public interest” would be met by private sector owners incentivised to make a profitable use of those assets.

Even when Government held sites are in use, we have no idea whether that use is truly meeting the public interest. The Housing Authority is monopoly provider of housing assets to half the population. Where, north of our boundary with the Mainland, State companies dominate an industry (say steel production), they are roundly criticised by many for production that does not reflecting true market demand, on account of their being a state run monopoly. Those same critics never ask whether the supply of housing in Hong Kong represents true demand despite its being dominated by a state run monopoly.

Just as the use of assets held in the private sector is rendered unable to meet community demand because of our land lease structure, so the efficient use of publicly held assets is damaged for different reasons.

I often read comments that question why, given that Hong Kong is “so rich”, there are still poor quality buildings and acres of poorly used land. A big part of the answer is that the system of land use in Hong kong is a million miles from being a set of privately held and freely traded assets. Many international think tanks continue to insist on rating Hong Kong as one of the freest economies in the world. It seems they look only at the traded goods sector and ignore the rest.